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The term "business cycle" describes cyclical changes in economic activity that alternate between times of expansion and periods of contraction or recession. These variations happen over a number of years and are a normal aspect of the economy. The four stages of the business cycle are expansion, peak, contraction, and trough. According to indicators like the gross domestic product (GDP), employment, and industrial production, the economy grows throughout the expansion phase.
During the peak period, when economic activity is at its maximum point and growth is slowing and inflation is starting to climb, the economy is at its most active. Economic activity declines during the contraction phase, which is characterized by dropping industrial output, growing unemployment, and declining GDP. After reaching its lowest point in the trough phase, the economy begins to recover and enter the growth phase once more.
To make wise financial and investment decisions, it is essential to comprehend the business cycle. Investors can forecast the possible risks and opportunities connected with various sorts of investments by determining where the economy is in its cycle. As an illustration, equities typically do well during expansionary times, but bonds typically perform better during contractionary times.
